The Reserve Bank of India has always worked towards strengthening the foreign Currency reserves and now the situation is that the reserves may hit USD 400 Billion benchmark any time soon leaving the RBI Governor, Urijit Patel, in an intriguing situation as the rising liquidity in forex may be a threat to Modi and it’s low-inflation economy.
The analysts have expected India to cross this magical USD 400 Billion figure by the first week of September. While this will definitely incorporate enhanced macroeconomic stability with import cover rising to over 12 months, it may also lead to some uptick in inflation, say treasury officials.
“The forex reserves have been rising as the central bank is accumulating greenbacks by selling the rupee in the market which is already awash with liquidity. This excess liquidity may create some inflationary pressure,” the treasury head of a state-run bank told PTI.
The Consumer Price Index or CPI has almost doubled to 2.36% after a dramatic dip in June to 1.54% and this demonstrates danger sign to the low-inflation economy and may result in a hike in inflation.
Some Economists, on the other hand, are confident of RBI claiming that it will tackle the excess liquidity through equipping instruments such as open market operations and cash management etc.
A rise in the Foreign reserves is due to increased Foreign Direct Investments accounting higher capital inflows from foreign portfolio investors and other funds. The increase in reserves will introduce macroeconomic stability in the country.
So far, this calendar year, foreign portfolio investors have pumped in nearly Rs 1.75 trillion into the equity and debt markets.
The Morgan Stanley report had displayed the capital inflows put appreciation pressures on the rupee which could leave the market awash with liquidity, creating challenges for the RBI to manage its monetary policy.